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Note From Edward Hemmelgarn

It is my pleasure to introduce the first issue of the Shaker Investments Newsletter. This quarterly newsletter has been created specifically with our clients in mind. I believe you will find it informative and to the point.

In keeping with Shaker’s focus on intensive research, each issue will contain comments from one of our equity analysts. In this issue we include a look at the investment implications of human genome sequencing by Karen Mroz-Bremner, a Ph.D. in Genetics, who cautions that the rewards of genome research may not be immediately forthcoming.

Each issue will also include a brief interview with a senior officer of a growth company. In this issue we interview Steve Sanghi, President and CEO of Microchip Technology Inc., a leading provider of field-programmable micro controllers that are embedded in thousands of appliances and machines. Steve describes how the applications for these chips will continue to grow at an accelerated rate.

We welcome you as a reader and invite your comments. If you have any questions or desire additional information about the topics covered in our newsletter please contact us. Please note that we have moved our Cleveland office.

Analyst’s View

The Impact of Genome Sequencing
Karen Mroz-Bremner, Ph.D.

Despite all the media hype, it is unlikely that the sequencing of the human genome will result in dramatic advances in drug therapy in the next few years. Genome sequencing may indeed shorten the R&D process but investors should be aware that a drug will still need years of laboratory research as well as safety and efficacy studies in humans before FDA approval. Nevertheless, in the next five years we can expect the pharmaceutical industry to capitalize on previous genomic research and produce a few drugs that will target diseases more precisely, partially based on knowledge of why drugs work in some people and not others.

There are several prominent names at the forefront of genomic research, but it is far too early for investors to confidently identify the long-term winners. This will be especially true if we witness the rapid rise of companies that either do not exist or barely graze the radar screen today. This would be similar to the emergence of a whole generation of entrepreneurial companies that harnessed the potential of the silicon chip over the past three decades, including such luminaries as Intel, Sun Microsystems and Oracle. However, by looking at the drugs that biotechnology companies have on the market and under development —and the scientific research programs they are pursuing—investors can take educated guesses as to which biotechnology companies are well positioned for the brave new genomic world.

Investors are cautioned not to be too quick to discount the large pharmaceutical companies. The massive strength of their sales and distribution networks shouldn’t be underestimated. They, too, will capitalize on the study of genomics, through internal research as well as by acquiring promising new drugs through acquisitions and partnerships with biotechnology companies. These partnerships work well for both parties providing large pharmaceuticals with drugs for their pipeline and adding sales muscle to biotechnology companies.

The recent dramatic swings in the prices of biotechnology companies have created great opportunities for both biotechnology companies and investors. Many companies’ stock prices have more than doubled, plunged precipitously, and then rebounded, all in a matter of months. The huge rise of biotechnology stock prices earlier this year enabled many companies to successfully raise significant amounts of cash through initial public offerings (IPOs) or secondary financing. Investors also saw buying opportunities as prices fell dramatically this spring.

Although the recent rise in stock prices has made many stocks look expensive there will still be numerous opportunities for investors, as stock prices will almost certainly remain volatile.